Contents

Chapter 1 Introduction and summary

An outline of buy-outs, flexibility and the cost control pressures driving company car
policies, plus a summary of the main findings

Chapter 2 Fleet acquisition and management

A summary of the main fleet acquisition methods used by the case study companies, as
well as the growing trend to buy out cars altogether

Chapter 3 Eligibility and allocation

Details of how cars are allocated, along with eligibility, choice, and car users rights and
responsibilities

Chapter 4 Cash allowances and flexibility

Approaches to cash alternatives, and trading up and down

Chapter 5 Additional costs: insurance and fuel

A look at the other costs associated with the provision of company cars, including details
of fuel allowances for both company and private use

Chapter 6 Tackling health and safety

An outline of companies current health and safety policies in relation to company cars
and the potential impact of the forthcoming corporate manslaughter law

Background

The provision of company cars has long been used as an incentive in recruiting and
retaining staff. The majority of large organisations provide company cars, either for
essential use or as a status reward or both. Figures on the number of company car drivers
vary, though it is apparent that the number of company cars has fallen in recent years -
the Department for Transports figures indicate that in 2004, 5% of household cars were
company-owned, a fall from 9% in 1992/19941.

In April 2002 the tax position changed from one based on size of engine and number of
miles travelled, to one based on carbon dioxide emissions.

Advantages of providing company cars

For the employer
it is a visible reward and confers status
it is recognised as an essential part of the benefits package for recruiting and retaining
quality staff
it is a controllable reward scheme that does not increase the wage and pension bill
(although there will be National Insurance implications for employers - see below - there
are no NI implications for employees)
with a restricted choice of vehicles, it can reinforce a particular image of the company
For the employee
having a company car is very convenient as it removes concerns about servicing,
replacement, etc
it is a visible reward and it confers status
in spite of considerable tax implications (see below), a company car still has a significant
financial value, which is independent of salary limitations
If there are so many advantages, why change?
new tax changes have made a company car economically less desirable for some
employees
running a large fleet has become increasingly complex and costly for the employer
new, flatter organisations and more openness are antipathetic to cars as status symbols
a new, less rigid approach to employment and reward allows for a more flexible system
of benefits
greater concern for the environment
Considerations in traditional company car policies
Who is responsible for company car policy?

At its simplest, ownership of the policy may lie either with the personnel group, who
want to use it as an employee benefit and incentive, or with the purchasing group, who
see it as a direct business expense and want to manage the cost. In reality, the situation is
much more complex and depends on other factors such as:

the size of the company, the nature of the business and what benefits are offered by its
competitors
the size of the fleet and whether the cars are bought outright or leased (because of its
flexibility, contract hire is becoming more popular than purchase)
distinguishing between the management of the policy and the overall strategy.
In many organisations, the traditional role of the fleet manager has virtually disappeared,
with the function now performed either by an outside agency or from within the
personnel group.

Outsourcing

An alternative to in-house control of the car fleet is to outsource, wholly or in part, to a

specialist fleet management agency. This is especially valuable in companies with larger
fleets where there are the advantages of economy of scale. Fleets of fewer than 20 are
still almost always managed in-house, but even these smaller fleets are increasingly
turning to outsourcing because of other advantages such as having replacement vehicles
readily available.

The main benefits of outsourcing are:

it is guaranteed to meet the business requirements of having a fleet of reliable and easily
replaced cars
outsource agencies are able to keep up to date with changes in legislation and with best
practice.

What to offer company car drivers

Regardless of whether the fleet is company-owned, leased, or supplied by an agency, you

have to decide on:

model choice - in an approved car list you need to decide between the financial
advantages of a limited choice of models (a single- or dual-badge deal) and the incentive
benefits of a much wider choice based mainly on value (although there may be some
restrictions on inappropriate models)
replacement policy - the vehicle will be replaced after a stated number of years or a
specific mileage or whichever of the two is reached first
allowing all those entitled to a company car to trade up or down (within the approved list)
with an appropriate salary adjustment
offering a cash alternative to all drivers (see below)
offering incentives for company car drivers to switch to other forms of transport (see
section on green issues).
It is also important to be explicit on the insurance cover provided.

Company cars and contracts of employment

Because the use of a company car may become an emotive issue, it is important that the
scope of its use is covered in the contract of employment.

The contract should state:

what type of vehicle the employee is entitled to

whether it is available for private use and whether there are restrictions on its use
who is allowed to drive the car
when it will be replaced (typically based on age or mileage)
who is responsible for the cost of fuel, maintenance, tax, insurance and repairs
whether the car user is required to make a contribution in return for private use of the car
whether there are circumstances (such as extended leave or during a driving ban) when
the vehicle may be withdrawn
the car user's responsibilities in respect of the vehicle.
Status versus essential user

The policy must clearly state the eligibility guidelines for each company car in either of
these categories.

Status cars:
pay level - in a recent IDS study2, the minimum qualifying salary ranged from 25,000 to
49,500, with 30,000 to 35,000 being the typical level
specific grade or position in the hierarchy.
Essential-user cars:
certain jobs eg in sales
more than a certain number of business miles per year (again in the IDS study2, this
varied from 3,000 to 18,000 miles, although 10,000 to 15,000 was more typical).
Alternatives to traditional company car provision

The aim of replacing, either voluntarily or compulsorily, existing company car provision
with something different is to provide a scheme which is:

cost effective for the company ie easy to run and economical (preferably costing less than
the existing scheme)
good for the company car driver (as a minimum, they should be no worse off)
seen to be fair by other employees
environmentally sound.
The basics

Although it is not mandatory, extra money is generally given in compensation for the loss
of a company car. The choices are:

extra salary (typically for status car drivers): this is normal salary for all purposes
including tax and pension
a cash allowance (typically for essential car users): this is not part of the employee's
salary for the purpose of bonuses, pension etc and is subject to specific tax rules.
Cash allowance schemes and Personal Contract Plans

Many companies offer cash alternatives. However, it seems that organisations have been
reviewing their policies on cash alternatives in response to the tax changes (see below).

Having a Personal Contract Plan (PCP) to complement the cash allowance allows
employees to continue having the use of a vehicle under similar conditions to their
company car. Basically, a PCP entails making payments over an agreed period of time to
finance a car, then having the option at the end of the period either to buy the car or start
a new plan. For added convenience, some of these plans include, for example,
maintenance and insurance costs within the monthly payment. Some, but not all,
employers arrange for payments to be made through their payroll. Some organisations are
offering PCPs to all employees (not just to those with company car entitlement), while
others, instead of offering an optional scheme, have decided to buy out their entire
company car fleet. Organisations offering PCPs can be found under 'Car leasing &
contract hire' in the Yellow Pages.
Employee Car Ownership Schemes

Some companies, such as Abbey National, have begun Employee Car Ownership
Schemes (ECOS). ECOS allow employers to transfer the ownership of the car from the
organaisation to the employees who are not taxed on the benefit of a company car. The
employee enters into an agreement with a leasing fiorm for the purchase of the vehicle
over an agree period and milage. At the end of the period the car can be sold back to the
leasing company with nothing more to pay, so long as the car is returned in an acceptable
state. Alternatively, the employee can be offered the opportunity of owning the car by
making a single payment. The tax rules are complex, so specialist advice may need to be
sought.

Employee consultation

Ideally, employees should be consulted before changes are made to a company car
scheme, to find out what their preferences are but, whatever scheme is chosen, it must be
explained fully so that company car drivers understand the reasons for the changes. If
employees are not properly informed and, as a result, believe that a new scheme is solely
a cost-cutting exercise, this may cause problems with motivation and staff retention.

Green issues

From 6 April 2002 the tax charged on the benefit of a company car is linked to carbon
dioxide (CO2) emissions. New cars can be checked on the Vehicle Certification Agency's
website and older cars can be checked on the Society of Motor Manufacturers and
Traders website.

Go to Vehicle Certification Agency's website

Go to Society of Motor Manufacturers and Traders' website
The government is also considering other proposals such as taxing the provision of
workplace parking to encourage work journeys using public transport.

In addition to meeting their legal obligations, it is desirable for organisations to support

environmentally-friendly initiatives. Consider whether it would be possible to do some of
the following:

encourage the use of greener cars (eg smaller and/or more fuel efficient) through your
approved car list
severely limit the provision of free fuel
encourage the use of video conferencing etc in order to reduce the amount of travel to
business meetings
organise and support a car sharing system
provide a works bus or subsidise park-and-ride tickets
give vouchers or loans to encourage the use of other forms of transport such as bicycles
or public transport
provide free (or pool) bicycles and safety equipment
make good provision for cyclists by having secure and convenient bicycle parking areas,
and shower and changing facilities for people who cycle to work.
Transport 2000 is a national campaigning organisation dedicated to encouraging
sustainable environmentally-friendly transport. As an umbrella organisation, it brings
together a range of over 40 groups whose aim is to provide real solutions to transport
problems. They lobby government, seek solutions to transport problems that rely less on
cars and more on public transport, cycling and walking, and develop green transport
plans for employers.

Company cars and fuel as a taxable benefit

When considering whether to provide company cars and fuel for private use, it is
essential to consider the tax implications, since this provision results in significant
additional taxes for both the employer (in the form of National Insurance Contributions -
NICs) and employee (in the form of income tax).

Tax on a company car is based on the value of the car and its CO2 emissions. Since 6
April 2003, car fuel benefit has been based on a percentage of a set figure according to
the car's CO2 emissions. Further information on income tax and NICs including an online
company car and car fuel benefit calculator is available on the HM Revenue & Custom's
(HMRC) website (see Useful contacts below). They also publish a range of booklets
and guides.

Workplace parking

This affects all drivers, not only those with company cars, but clearly an over-generous
company car policy will have implications for the pressures on workplace parking.
Workplace parking is an attractive benefit.

Providing a parking space is not a taxable benefit but providing vouchers or

reimbursement of parking expenditure is, so the costs or problems of workplace parking
should be taken into account when considering the overall cost of your company car
policy.

Congestion charging

Congestion charging was introduced to London in February 2003. Companies may need
to make clear if they will reimburse employees for journeys undertaken for business into
the central zone.
Useful contacts
HM Revenue & Customs (formerly the Inland Revenue) This section of the website gives
information on calculating company car benefits. You can also see their publications on
company cars.
AA website
It is possible to check your own tax position on this website.
Transport 2000
Organisations offering Personal Contract Plans can be found under 'Car leasing &
contract hire' in the Yellow Pages.
References

DEPARTMENT OF TRANSPORT. Section 6: Other factors affecting travel. Available at:

http://www.dft.gov.uk/stellent/groups/dft_transstats/documents
/page/dft_transstats_039335.pdf
INCOMES DATA SERVICES. (2006) Company cars & business travel. IDS HR Study
817. London, IDS.